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National Political Community and the Politics of Income Taxation in Brazil and South Africa in the Twentieth Century

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National Political Community and the Politics of Income Taxation in Brazil and South Africa in the Twentieth Century POLITICSEVAN S. LIEBERMAN & SOCIETY National Political Community and the Politics of Income Taxation in Brazil and South Africa in the Twentieth Century EVAN S. LIEBERMAN Why was the South African state so much more successful than the Brazilian state in its attempts to collect income taxes during the twentieth century? Nationally distinc- tive tax policies and patterns of administration can be explained by examining the impact of contrasting definitions of National Political Community, specified in criti- cal constitutions written around the turn of the century. The ways in which racial and spatial cleavages were addressed in the 1891 Brazilian constitution and the 1909 SouthAfrica Act influenced thedevelopment of interclass and intraclass rela- tions, which in turn affected the willingness of upper-income groups to accept state demands for income tax payments. Varied patterns of state development were largely predicated on contested notions of “us” and “them.” During the twentieth century, government leaders around the world attempted to collect income taxes as part of a broader effort to finance rapidly growing expenditures. Income taxation proved to be an incredibly lucrative source of reve- nue for many governments, while having the desirable property of being “equita- ble,” as it could be collected with progressive rate structures. In their attempts to collect this tax, however, governments found that they faced high monitoring costs and required relatively high levels of cooperation and “quasi-voluntary” I would like to acknowledge financial support from the Fulbright Commission, the Social Science Research Council, the National Science Foundation (NSF No. 9724055), and the African Studies and Latin American Studies Centers at the University of California, Berkeley. For their valuable feedback, I would like to thank Ruth Berins Collier, David Collier, Marc Morjé Howard, David Leonard, Anthony Marx, Robert Price, John Quigley, Ian Shapiro, and Sven Steinmo. Thanks also to the edito- rial board of Politics & Society, especially to Margaret Levi, for excellent comments and suggestions. POLITICS & SOCIETY, Vol. 29 No. 4, December 2001 515-555 © 2001 Sage Publications 515 516 POLITICS & SOCIETY compliance, particularly from the economically dominant groups within society.1 Unlike other forms of revenue, such as consumption taxes and social contribu- tions, which tend to be paid more indirectly and/or with some promise of specific benefit, income tax payments tend to be highly visible and unrequited. Because the very demand for taxation provides incentives for citizens to free ride on the tax payments on others, initially, citizens have tended to resist the enactment of such policies. And while states have generally threatened coercion against those refus- ing to pay, coercion can be both expensive and ineffective in the wake of extensive avoidance and evasion schemes. Thus, state leaders attempting to collect income taxes have been highly dependent on the willingness of upper-income groups—who control the lion’s share of taxable resources—to pay such taxes. Over the course of the twentieth century, levels of cooperation with state demands for income tax payment have varied widely. In some countries, citizens have essentially ignored the state’s income tax policies, and virtually no tax has been collected at all. In others, some income tax revenue has been collected, but with significant challenge from those liable during the policy-making and/or compliance stages. And in still other countries, the tax has been collected effec- tively and efficiently, with few significant challenges from within society. In turn, such variation has influenced the size of the state treasury, the functioning of mar- kets, and the after-tax distribution of income within society. Such patterns of income tax policy and administration also reflect more generally on the relation- ship between the state and upper class groups within society and the degree to which such relations can be described as either adversarial or cooperative.2 Brazil and South Africa are cases of highly contrasting outcomes in terms of levels of state success in collecting income taxes from upper groups during the 20th century. On one hand, despite repeated attempts, the Brazilian state has never managed to collect huge sums of income tax, and by the 1990s, income tax collec- tions amounted to only about 5 percent of GDP. Instead, Brazilians have paid a wide range of complicated, hidden, and largely regressive taxes, levies, and other charges. By contrast, the South African state has managed to become one of the world’s most successful income tax collectors, collecting approximately 15 per- cent of its GDP in the form of progressive, direct income taxes, largely from high-income earners. Such contrasting outcomes are remarkable in light of enormous social, politi- cal, and economic similarities between the two countries (see Table 1). In terms of most development indicators, the two countries are virtually identical, with simi- lar levels of per capita income and similar levels of industrial development. In both countries, the size of the state is relatively large when compared with other upper middle-income countries, and total central state expenditure as share of GDP is about the same. These two societies are also characterized by the most unequal distributions of income in the world, as measured by the GINI coefficient, and in both, such economic inequalities are highly correlated with racial differ- EVAN S. LIEBERMAN 517 Table 1 Development Indicators in Brazil and South Africa (1994) Indicator Brazil South Africa GDP/Capita ($PPP) 5,400 5,130 Manufacturing/GDP (%) 25 23 GINI Index 63.4 58.4 Race × Income correlation High High Government expenditure/GDP (%) 32 33 Source: World Bank. World Development Indicators on CD-ROM. Ronald Inglehart et al. World ValuesSurveys and European ValuesSurvey, 1981-1984, 1990-1993, and 1995-1997 [Computer file]. ICPSR version. Ann Arbor, MI: Institute for Social Research [producer], 2000. Ann Arbor, MI: Interuniversity Consortium for Political and Social Research [distributor], 2000. ences. Moreover, these two countries share legacies of colonialism, European immigration, and slavery. In the wake of such similarities, it is surprising that the mix of tax policies and their application should be so different in the two countries. In this article, I argue that historically constructed definitions of National Polit- ical Community (NPC), varying in terms of how racial and regional cleavages were addressed in critical constitutions, influenced the development of class rela- tions, political strategies, and ultimately the willingness of upper-income groups to cooperate with state demands for tax payment. The National Political Commu- nity is the official, state-sponsored definition of the nation, which is specified in constitutions or other key policy documents during critical moments of political change. Although for most of the twentieth century, repressive regimes governed both countries to the benefit of the wealthy, I demonstrate that contrasting modes of inclusion and exclusion from the political community shaped very different political dynamics, and were ultimately responsible for very different paths to inequality. Through a series of intervening causal steps, the explicit form of exclu- sion that was embodied in South Africa’s institutionalized white supremacy ulti- mately legitimated the state in the eyes of white-owned firms and high-income individuals. Although lower-income whites constituted only a minority of all low-income people in Southern Africa during the first half of the twentieth cen- tury, the definition of a white NPC eventually facilitated strong cross-class link- ages between the white working class and the virtually all-white, upper-class groups. Ironically, this produced the legacy of a set of progressive tax policies and administrative practices that are today far more beneficial to blacks in that country than what their black counterparts inherited in modern Brazil. By contrast, in Brazil, where race chauvinism has been expressed in more subtle ways, but not through official state policy, class relations unfolded in almost the exactly oppo- site manner. The federal constitution helped make regional identities politically salient, and the virtually all-white upper groups came to see their interests as more 518 POLITICS & SOCIETY competing than shared. Such dynamics further exacerbated the distance between economic classes by providing idioms for mobilizing a sense of difference. In such a context, upper groups have not identified strategically or normatively com- pelling reasons to cooperate with the state executive and have largely resisted enforcement of the income tax. Without such “quasi-voluntary” compliance, state efforts to collect have been far less successful. Over time, these political patterns, and the tax policies and administrative practices they engendered, became increasingly institutionalized within these two countries. The remainder of this essay examines this argument through comparative anal- yses of political, economic, and social factors, and their influence on income tax collections. It begins by considering the limitations of several possible explana- tions to account for the variation between the two countries. It proceeds to investi- gate the alternative explanation by analyzing the impact of varied definitions of National Political Community on the development of tax politics in the
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